Disney’s latest earnings report and conference call after the market close on Wednesday showed a mix of progress under CEO Bob Iger, including in terms of cost-cutting and moving towards streaming profitability. It also showed challenges, such as in the linear TV networks business, as well as new initiatives, including plans to roll out a Disney+ ad tier abroad and crack down on streaming account sharing, that take pages from the Netflix playbook.
No surprise then that Disney shares in early Thursday trading were little changed, up 1.1 percent at $88.44, as Wall Street had much to digest overnight. First reactions showed that analysts remain divided between bulls and those more cautious until Disney answers open questions or shows further progress.
Several Wall Street experts lowered their stock price targets following the earnings update, while others touted their belief in an improving outlook.
Bank of America analyst Jessica Reif Ehrlich remains a key Disney bull, reiterating her “buy” rating and $135 stock price target in a Thursday report under the title “Strategic transformation in motion,” in which she cited “new areas of optimism.” Among them are management’s forecasts that it would save more than the $5.5 billion in cost cuts that it has targeted and that Disney+ subscriber net additions would accelerate in the current fiscal fourth quarter.
“While several strategic questions remain (e.g. future of linear, film, etc.), we remain confident in Bob Iger’s ability to navigate the company through this transition period,” Reif Ehrlich concluded. “Disney historically has traded at a 20 percent-plus premium to the S&P 500 (on price/earnings) versus the modest discount it is trading at today (on calendar year 2024 earnings estimates). Given the latest guidance as well as cost cutting initiatives, we believe consensus forecasts will likely be biased to the upside. Additional progress toward achieving the company’s broader strategic goals could drive multiple expansion back toward their historical premium levels.”
Other Wall Street experts focused more on the near-term challenges for the Hollywood powerhouse.
MoffettNathanson analyst Michael Nathanson maintained his “outperform” stock rating on Disney, while cutting his price target by $5 to $115 “to reflect our lower estimates.” In a report entitled “As Promised, Bob,” he highlighted: “We do not factor in potential upside from any strategic structural asset changes.”
Among his estimate changes, the expert cut his fiscal year 2024 adjusted earnings per share estimate by 15 cents to $4.65 and his fiscal year 2025 estimate by 30 cents to $5.80 a share.
Outlining the company’s current challenges, Nathanson explained: “The structural headwinds of Disney’s linear business and the aggressive shift into streaming distribution, coupled with post-pandemic headwinds, has collapsed Disney’s profits in their Media and Entertainment Distribution business (DMED). In fiscal year 2018, the year before the acquisition of Fox and the launch of Disney+, DMED generated $9 billion in EBITDA. In fiscal year 2023, we now estimate DMED profitability to be $2.4 billion. At the same time, Disney’s Parks and Experiences Business (DPEP) is generating much higher profits in fiscal year 2023 than it did in fiscal year 2019.” The analyst forecasts $12.3 billion this year, up from $9.6 billion in fiscal 2019.
Nathanson also highlighted the challenges analysts face with valuing Disney’s legacy film and TV studios these days. “Unfortunately, Disney’s disclosure and new business structure make it impossible to benchmark this asset,” he said. “In fiscal year 2018, the year before Disney acquired Fox, Disney’s Filmed Entertainment business did $12.3 billion of revenues and $2.7 billion of EBITDA. Given the move to self-license and the collapse in both theatrical and home video windows, we wonder what profitability looks like today.”
The MoffettNathanson also touched on the issue of possible asset sales or spin-offs that Iger has said his team was exploring. “Given that Disney is in the process of exploring all options when it comes to its future mix of assets, we think there is a clear case to be made that under any scenario Disney’s assets are worth materially more than its current enterprise value,” Nathanson concluded. “Perhaps the easiest way to close that gap would be to create a new company (or “newco”) with Disney’s Parks, Experiences and Products segment combined with Disney+ and the studio IP that fuels these flywheels. This asset would likely trade at a premium valuation given the high moat, iconic assets and strong revenue growth.”
The rest he would put into a separate “oldco, housing Disney’s linear networks, ESPN+, Hulu SVOD, Hulu Live TV and Disney+ Hotstar. “Given peer [stock] multiples at Fox and Warner Bros. Discovery, we have no illusions that the market will be generous in the valuation of these businesses,” Nathanson argued. “Yet, we think that the low current implied value of Disney’s non-park businesses doesn’t require anything heroic for these moves to be accretive.”
Wells Fargo analyst Steven Cahall maintained his “overweight” rating on Disney shares, but reduced his stock price target by $1 to $146 in a report entitled “Adaptation.”
“While it’s hardly an easy road ahead, we sense a new Disney defined by adaptation, including cost cuts, price increases, content shake-ups, portfolio shaping, etc. Everything is on the table, and this could be the turning point,” he pointed out.
Among the planned changes at Disney, he highlighted: “another big price increase on ad-free (domestic Disney+ to $13.99 per month, Hulu $17.99 per month, Duo $19.99 per month), new international Disney+ ad tiers, on-track to exceed $5.5 billion in cost cuts, a password sharing crackdown ahead, a sports betting alliance with Penn to get top dollar, seeking ESPN DTC partnerships, and a willingness to transact non-core/non-ESPN linear nets (excluding content houses).”
In streaming, including bundles, Disney now has 77.5 million unique subscribers in the U.S. and Canada, Cahall wrote, mentioning that this was “on par with Netflix.” The analyst went further with the Netflix comparisons. “We are already bulls on DTC long term given Disney’s scale and margin potential driven by cost cuts and price ups,” he explained. “We think new Disney+ pricing is more consistent with the Netflix average revenue per user (ARPU)/content ratio of about $1 per month for each $1 billion of content value.” Concluded Cahall: “We see the DTC earnings path as the biggest potential value unlock.”
The Wells Fargo expert also took a look ahead, summarizing key investor questions and debates ahead of a planned investor event in September. “It now seems like a lot is on the table and we’d expect the updates to focus on: 1) how to improve content, which Bob Iger referenced on the earnings call and remains critical; 2) outlook for streaming, including when to see cost improvements drive DTC towards break-even in fiscal year 2024; 3) potential portfolio changes, such as selling linear excluding ESPN/ content houses; and 4) key factors ahead of ESPN’s DTC transition.”
CFRA Research analyst Kenneth Leon reiterated his “buy” rating on Disney’s stock after the earnings update, but cut his price target by $22 to $105. “We think Disney holds great value, with distinct assets that may be recognized using strategic realignment and likely spin-offs,” he explained. But he cut his earnings estimates for fiscal years 2023 and 2024, which in turn drove his stock price reduction.
In contrast, Guggenheim analyst Michael Morris maintained his “buy” rating and $125 stock price target on Thursday. “Fiscal third-quarter revenue was largely in line with consensus expectations, with a parks beat largely offsetting media softness,” he summarized his key takeaways from the earnings update. “Cost discipline at DTC drove a segment operating income beat.”
Based on the earnings report and call, Morris lowered his fiscal fourth-quarter segment operating income estimate from $3.3 billion to $2.8 billion and his fiscal fourth-quarter Disney+ core subscriber net additions forecast from 3.5 million to 3.0 million, including 1 million domestic and 2 million international users. The analyst also raised his fiscal year 2024 DTC outlook, saying it will be “benefiting from the price increases.”
But Morris remains bullish, concluding: “Our $125 price target reflects our confidence in the long-term strength and potential for parks growth and the renewed focus on profitable growth at the company’s media and entertainment assets.”
Meanwhile, Macquarie analyst Tim Nollen stuck to his “neutral” rating and $94 price target on Disney, summarizing the latest results this way in his report headline: “So much going on, but not much change to numbers.”
“New news included price increases on Disney+ and new ad tier launches, but nothing concrete on big-picture plans for ESPN or other assets,” the analyst highlighted before explaining why he is staying on the sidelines for now. “We believe in long-term success of streaming services, including ESPN, as well as the studio and parks franchises. But we see too many near-term issues to support a more constructive view.”
TD Cowen‘s Doug Creutz also remains less bullish on Disney, reiterating his “market perform” rating with a $94 stock price target, but highlighting that his estimates and model were “under review” following the earnings update.
He called the latest results “a mixed bag” and expressed concern about “DTC prices going up while content gets reduced.” Wrote Creutz: “We worry that consumers will respond poorly to the move given Disney’s simultaneous decision to cut back on original content, exacerbated by the impact of the Hollywood strikes. Even if the severe price/value shift is accepted by consumers, it’s still not clear if the rate of DTC profitability improvement will more than offset the rate of linear profitability attrition (likely over $2 billion year-over-year in fiscal year 2023).”
Beyond Wall Street, Jamie Lumley, analyst at Third Bridge, also commented on Disney’s latest earnings report and conference call, initially focusing on ESPN. “The sports betting deal with Penn Entertainment marks another major change for ESPN and Disney as a whole,” he highlighted. “As cable audiences continue to shrink, this could be an initiative to drive growth and broaden the revenue base as Disney looks to explore strategic options for this asset.”
He also mentioned that experts expect that ESPN could make a full pivot to streaming in 2024, arguing: “However, Disney will likely want to first resolve the future of Hulu before it makes any other transformational changes.”
Disney’s streaming outlook was, of course, also a key issue for Lumley. “Although the streaming business continues on its march to profitability, there is a long road ahead,” he wrote. “Our experts expect that 2025 is a more realistic timeline to achieve profitability than next year, especially considering factors like the dual strike in Hollywood and relatively weak reception of Disney’s content by audiences.”